THE impact of Coronavirus or COVID-19 on human lives has been extremely alarming. With about 250,000 people already infected by it and over 10,000 reported casualties by the third week of March 2020,¹ the fatality rate may still be just about 4%, but the flu’s rapid spread across as many as 180 countries and territories has posed the biggest health challenge the world has faced since 2003, when the Severe Acute Respiratory Syndrome (SARS) had infected over 8,000 people across 26 countries, killing over 800 of them. India has not been spared from its wrath either – though its spread is limited to less than 200 people in 20 states/union territories and only four succumbing to the virus at the end of March 19.²

Anticipating the rapid spread of the respiratory disease and the enormity of the challenge, the World Health Organization (WHO) had declared on March 11, 2020, that COVID-19 was a pandemic, leaving nobody in doubt that this was a global outbreak of a new disease. ‘This is not just a public health crisis, it is a crisis that will touch every sector,’ explained WHO Director-General Tedros Adhanom at a media briefing.

That statement by Dr Adhanom was hardly an exaggeration. Already, the prognosis of how COVID-19 will be impacting the pace of global economic activity is turning out to be quite grim. It is becoming increasingly clear that the latest strain of this rampaging flu can not only kill thousands of people, but also undermine economic activities and, more worryingly, result in a significant shift in the way businesses are conceived and conducted in the world.

There will thus be an immediate adverse impact of Coronavirus on trade and growth. But there will be another disruptive impact on the way economic activities are structured across the globe in the medium to long term. Both the impacts need to be studied and evaluated to understand the full implications of COVID-19.

Latest estimates from leading global organizations are an eye-opener. The International Monetary Fund (IMF) has indicated that growth in 2020 will be much lower than the 2.9% growth seen in 2019. The Organization for Economic Cooperation and Development (OECD) has been more precise by forecasting that world growth in 2020 would be lower at 2.4%. If the disease affects more countries for a longer period of time and becomes more intensive, global growth could even plunge to 1.5% in 2020, warns OECD.

The Asian Development Bank (ADB) has estimated that the world’s gross domestic product (GDP) could be lower by 0.1 to 0.4% and the financial losses as a result of COVID-19 could be between $77 billion and $347 billion. The United States has warned that this might trigger an economic recession after about a decade of uninterrupted growth. For the first quarter of 2020, the portents are ominous. JP Morgan, an investment bank, has forecast that the US economy may shrink by 4%. And the contraction in the April-June quarter would be much higher at 14%. Goldman Sachs, another investment bank, has projected that the Chinese economy would contract by 9% in January-March 2020, instead of an earlier anticipated growth rate of 2.5%.

Such forecasts have been quickly followed up with announcements of measures to provide funds to help countries face the economic onslaught of the Coronavirus outbreak. The IMF has promised $50 billion and the World Bank has pledged $12 billion to help their member countries to fight the disease and its impact. The US has also announced a $50-billion aid package for its states to battle the virus.

 

The IMF has already received financing requests and inquiries from as many as 20 countries. It expects more requests to come in as the disease spreads to more countries, as is being feared, and has underlined the need for countries to initiate coordinated steps to tackle the challenges from the disease as also its impact on the economy. ‘Central banks must support demand and confidence by preventing a tightening of financial conditions, lowering borrowing costs for households and firms, and ensuring market liquidity,’ the IMF has stated in its broad advisory to its member countries. Central banks of many major countries have already paid heed to the IMF advice and have announced a cut in the interest rates and injected fresh liquidity in the system.

The IMF’s other piece of advice, however, has not seen too many takers so far. That advice pertains to the need for governments to step up fiscal policy to provide sizeable support to the most affected people and firms, including in hard-to-reach informal sectors. But then these are early days and as the impact of COVID-19 becomes more widespread and adverse, many governments may be forced to loosen their purse strings and announce fiscal stimulus measures to revive demand. India, too, will come under huge pressure to announce a stimulus package. It has already set up a special task force, headed by Finance Minister Nirmala Sitharaman, and it is expected to announce special packages to help the Indian economy.

 

Prospects for global trade have turned even more gloomy as China, the second largest economy and the largest trading country in the world, has been hit the hardest by Coronavirus. The outbreak of the flu began at Wuhan of the Hubei province in China, which accounted for the largest number of deaths till March 19, when Italy surpassed it as having recorded the largest number of casualties. The consequent economic disruptions in China have taken a heavy toll of the Chinese economy, which also plays a critical role in global supply chains that underpin globalised manufacturing and trade.

The United Nations Conference on Trade and Development (UNCTAD) has estimated that the manufacturing slowdown in China could lead to a $50 billion decline in exports across global value chains. The Purchasing Manager’s Index, which is an indicator of manufacturing activity, crashed by about 22 points to just 37.5 for China in February. It was the lowest score since 2004 and experts have noted that such a drop could translate into a two% reduction in exports on an annual basis.

The decline is feared because China is now the central manufacturing hub of many global business operations and a slowdown in China would have an adverse fallout for many other countries. The global impact of SARS, which too had originated in China in 2003, was far more limited. China in 2003 had a share of just 4% in global output, while now its share has zoomed to 16% of $87 trillion of the world’s total output in 2019.

By February (the flu had hit Wuhan by the end of December), half of the 4,000 outlets of Starbucks, a global beverages chain, and 290 of the 800 suppliers to Apple, the mobile phone maker, had shut up shop in China. The number of passengers travelling by air had dropped by 55%. Not surprisingly, the UNCTAD estimate notes that the production loss for different regions would be over $15 billion for the European Union, $6 billion for the US and $5 billion for Japan.

The stock markets have sensed the impending economic downturn and seen a meltdown that are reminiscent of the financial crisis of 2008. From a high of about 27,000 on March 4, the Dow Jones Industrial Average has crashed by over 25%. Other stock market indices of other developed markets have also seen similar slides. Here also, the Indian stock markets have kept the company of their global peers.

 

So intense and overwhelming has been the Coronavirus factor on business sentiment that even a dramatic fall of international crude oil prices in early March could not assuage the market mood. On March 9, Brent crude oil prices dropped by over 30% to $28.5 a barrel over a stand-off between Saudi Arabia and Russia, who are the second and third largest producer of oil in the world, respectively. This was in the wake of the Coronavirus outbreak. The stand-off led to Saudi Arabia (with a 12% share in global oil output) deciding to increase production, triggering fears of an oversupply in a market already hit by lower demand following fears of an economic slowdown.

Crude oil prices in subsequent days recovered marginally, but they have stayed at around $30 a barrel since then. Under normal circumstances, a fall in crude oil prices would have cheered the stock markets and the overall mood in the economy. But with the Coronavirus fear looming large over the world, the lower oil prices have failed to lift the sentiments. Instead, they have added to the gloom with the United States, the largest oil producer and a significantly large exporter of oil, realising that lower oil prices do not augur well for its economy as well.

Consider the irony. When crude oil prices go South, airlines all over the world celebrate as their operational costs benefit hugely and they start booking profits. But the current crude oil price drop has come at a time when airline companies can hardly take advantage of it. Large-scale cancellations of flights in the wake of the Coronavirus outbreak have nullified whatever gains airlines could have made under ordinary circumstances. Indeed, many airlines have come out with scary pronouncements of a shutdown in the near future in view of the huge impact their businesses have suffered on account of the cancellation of flights.

Not only the aviation sector, large segments of the economy the world over are dependent crucially on crude oil and lower prices help improve their margins. But with fears of a recession looming large, no country or company is in a position to rejoice over lower oil prices. The bigger challenge of reviving demand will keep them busy for at least the next few quarters.

 

Even though the number of Indians affected by COVID-19, till the third week of March, remained lower than those in many other countries, the Indian economy has already begun showing early signs of the stress caused by the turmoil in the global markets and the advance precautionary steps taken within the country to prevent the outbreak of the flu. CARE Ratings, a research and rating agency, conducted in early March a quick survey of about 150 stakeholders in the economy, representing various sectors.

 

The survey showed that each of the participants expected a decline in GDP growth in 2020-21, compared to the 5% growth expected in 2019-20. Almost a third of them expected the growth decline to be of about half a percentage point, while a smaller proportion of participants expected the growth decline to be in the range of 0.75% to 1%.

But even for 2019-20, India’s economic growth may decelerate in the last quarter of the year. There are now serious doubts over whether the January-March quarter of 2020 will be able to clock an expected growth rate of over 4.6%, in view of the huge adverse impact of COVID-19 on trade, hospitality including hotels and restaurants, aviation and a host of other sectors.

In addition, road traffic has seen a huge drop ranging between 25 and 40% in March. National highways in the country have experienced a fall in the toll collections to the tune of 20% in the second and third week of March. Delhi Metro, India’s largest rapid transport network, has seen an 18% fall in its daily footfall in the first half of March, over 5.7 million recorded in February.

The Indian Railways has recorded a 45% drop in its passengers in the third week of March. A third of the tickets booked in the past have been cancelled. Many domestic airlines have reduced the number of flights they used to operate domestically and even cancelled their international operations, with one of them reporting that its earnings in the first quarter of 2020 would be significantly impacted. As many as 150 aircraft may have to be grounded, causing financial hardships to the airline companies.

There is thus a strong possibility of 2019-20 recording less than 5% GDP growth, compared to 6.1% in 2018-19.The impact of lower growth in 2019-20 and a further deceleration in 2020-21 will have serious implications for the jobs market. Various industry estimates suggest that the impact of Coronavirus on jobs will be huge, with millions of job losses. One estimate puts the job losses, as a result of reduced business and slower economic activity, at about 14 million in sectors like hotels and tourism (1.2 million; a job loss of 3% of the total industry workforce), restaurants (1.5 million; a job loss of 20%) and retail (11 million; a job loss of 25%). India’s unemployment problem will acquire an even more serious dimension.

 

Many sectors in the Indian economy are acutely vulnerable to a global disruption of the kind that the spread of COVID-19 will bring about. Small businesses will be hit particularly because more restrictions on social contact and travel will mean a decline in demand for their services and goods. The healthcare industry in India, which had boomed of late riding on a steadily rising inflow of patients from various foreign countries, will also be affected as a result of reduced air travel. The knock-on effects of a sharp fall in stock prices will also dampen demand for discretionary and luxury spending. The wealth erosion of consumers, invested in the stock markets, will result in lower spends, which in turn will dampen growth prospects. This will have an adverse consequence for manufacturers of automobiles, jewellery and luxury goods.

India’s merchandise exports too will take a hit in the coming months. Exports of merchandise goods in February clocked a growth rate of 2.91%, but these during April-February 2019-20 continued to show a contraction of 1.5%. With the impact of COVID-19 certain to be felt on exports in March, India’s exports in the entire year of 2019-20 is set to decline, after a 9% growth rate recorded in 2018-19.

The fall in international crude oil prices, reaching a 17-year low, will also mean a lower rise in India’s import bill. And this might help India keep its current account balance under check, although the advantages will be neutralised to some extent by the sharp depreciation in the value of the Indian rupee against the US dollar. The Indian rupee slid to its record low of about Rs 75 for a US dollar on March 19. Nevertheless, a relatively low current account deficit will be a big relief as the Indian economy will cease to enjoy the cushion of capital inflows from abroad through foreign portfolio investments, thanks to global investors seeking refuge in safer instruments in their respective countries. India’s capital inflows through foreign direct investments may also slow down with the global economic downturn that the leading countries in the world, particularly the US and China, fear.

 

There will be many other adverse macroeconomic consequences of COVID-19 for India. The Union government will come under increasing pressure to come out with a fiscal stimulus package to revive demand and give a boost to economic growth prospects. In the wake of the 2008 global financial crisis, the Indian government did come out with an attractive fiscal stimulus package including cuts in taxes and duties. With the fiscal deficit in 2006-07 having been reined in at 2.7% of GDP, the Centre had a lot of headroom for adopting a fiscally expansionary policy.

However, that flexibility is not with the government at present. Already, its fiscal deficit targets have become difficult to meet, with slowing tax collections. Any step-up in expenditure or reduction in tax rates would mean a further widening of the fiscal deficit, undermining the government’s fiscal consolidation efforts. What will complicate India’s macroeconomic challenges, in the wake of COVID-19, is the weak state of its financial sector. While some recovery had begun to take place a year ago, with the resolution of stressed loans after the adoption and enforcement of the Insolvency and Bankruptcy Code, the stress in the financial sector may worsen in the coming months because of the slowdown effects on banks and other financial intermediaries.

 

The more troubling aspects of COVID-19 pertain to the manner in which it would trigger a change in the way companies conduct their businesses. Governments across the world have already recognised the threat of COVID-19 and the need to lay down specific health care policies and expand the health care infrastructure to face up to similar challenges from diseases that can become pandemics. Simultaneously, companies across the globe would start exploring re-engineering their business processes to minimise, if not eliminate altogether, the impact of such diseases.

There is a distinct possibility that global value chains, which rely on building a network of manufacturing facilities spread across different countries, will no longer be in favour among many industrial groups. Minimising risks of business uncertainties has always been a key goal of all successful business managers. The Coronavirus outbreak has already taught managers the importance of planning their businesses in a way that they increase their dependence on local resources, local workers and local procurement of raw materials. Will this mean a fresh challenge to the principles of globalisation? Will the business motto of thinking global become obsolete? COVID-19 has certainly made businesses across the globe rethink these options.

 

Sectors like civil aviation and health care services will also be under pressure to re-engineer their business models. The idea of air travel in the economy class that entails close and congested seating arrangements even in long flights may have to be revisited. Hospitals in emerging economies, which take advantage of cheaper health care costs, may now find the idea of wooing patients from other countries a problematic proposition.

A large number of service sector companies will start exploring options of junking the idea of a centralised office space. Working from home may not just be a response to an outbreak of a disease, but a viable option, which will bring in many other cost advantages to make the business more viable. Product delivery companies will also explore new business opportunities as people will consider shopping online a safer option than visiting a mall. The entertainment industry may be shaken up. The need for social distancing to avoid the spread of a disease may also spell trouble for movie multiplexes or spectator sports, whose promoters and organisers may have to think their business plans afresh.

COVID-19 has already taken a heavy toll of the global economy in terms of its output and trade. India will be no exception. But the question to which there is as yet no clear answer is how soon the impact of COVID-19 will result in companies doing businesses in newer ways – both in India and across the globe.

 

Footnotes:

1. https://www.worldometers.info/corona-virus/countries-where-coronavirus-has-spread/

2. https://www.mohfw.gov.in/